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First Moody’s and now Fitch are coming out with negative comments about the summit. That provides mores more air cover for S&P to downgrade France 1 notch.

Normally I don’t care that much about ratings (they are a lagging indicator) except when they can create forced selling. I didn’t think cutting the US ratings would impact US yields – and it didn’t. It did affect the stock market though.

Will a downgrade of France cause forced selling? Probably not as it would likely be only one rating agency.

Will a downgrade of France cause pressure on their yields? I think it would because unlike the US the elements of solvency risk are starting to creep in. It is becoming clear that France has been pledging and guaranteeing their way into massive “off-balance sheet” exposure. They CANNOT independently print their way out of the problem unlike us. They do not have most of their debt held by its own citizens – like Japan. There will be pressure on their bonds for all these reasons. France is already wide of Germany for these reasons but it will get wider after a rating agency highlights the problem.

But that isn’t the main cause for concern. The entire EFSF program and the large un- capitalized portion of ESM are put in jeopardy. Those programs have relied on AAA rating for credibility. It will be the total loss of credibility of those plans that will spook the market. That 6 months have been spent relying on them to save the day without realizing the impact on France is what will cause the market to react very negatively.

The EU and EIB may also get notched in that case, further hurting the reputation of the EU and their plans.

Political pressure may stay the hand of S&P but if not, this should spark a steep decline in risk asset prices. It may even make it more difficult for the ECB to print as one of its strongest members stumbles.